The Welfare Implications of Alternative Unemployment Insurance Plans

A recent survey of and extension to research on the topic of unemployment insurance (UI) by Tope1 and Welch (1980) focuses on the issue of UI financing. In particular, following Becker (1972), theyare interested in the influence of the experience-rating provisions of the American UI system on a firm’s layoff policy. They suggest that a more complete model of both firms and workers would be a fruitful endeavor, and two efforts of this type have been made by Azariadis (1979) and Brown (1980). This paper investigates a penumbral issue in the UI financing literature: the relationship between experience rating, public and private UI systems, and individual welfare. A public insurance system can never be perfectly experience-rated if the government desires people with different layoff probabilities to hold identical insurance policies. A corollary proposition is that a private insurance system, if information is perfect, would always feature fully-rated plans, but the characteristics of these plans may frustrate other public policy goals (e.g., income transfer or maintenance).